UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended September 30, 2004

OR

For the transition period from                     to                    .

Commission File Number 000-26934

Hyperion Solutions Corporation

1344 Crossman Avenue, Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408) 744-9500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]   No [   ]

As of October 31, 2004, there were 38,989,188 shares of the registrant’s common stock outstanding.

HYPERION SOLUTIONS CORPORATION
FORM 10-Q

“Hyperion,” the Hyperion “H” logo and Hyperion’s product names are trademarks of Hyperion Solutions Corporation. References to other companies and their products use trademarks owned by the respective companies and are for reference purposes only.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. The balance sheet at June 30, 2004 has been derived from the audited financial statements, but it does not include all disclosures required by generally accepted accounting principles. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended June 30, 2004.

In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair statement have been included in the accompanying unaudited financial statements. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year ending June 30, 2005.

2. Significant Accounting Policies

Revenue Recognition

We derive revenues from licensing our software products and providing maintenance, consulting and training services. Our standard software license agreement is a perpetual license to use our products on an end user, concurrent user or central processing unit basis.

We record revenue from licensing our software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates included in the agreements.

Customers may also enter into arrangements that are typically on a time and materials basis for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate we charge for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenues are typically recognized as earned. Consulting revenues are generated primarily from implementation services related to the installation of our products. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Our services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product and implementation does not require significant modification or alteration. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Payments related to the software product to which the services relate are typically billed independently from the services and, therefore, are not coincident with performance of such services. License agreements generally do not include acceptance provisions. In the infrequent circumstance where an arrangement does not qualify for separate accounting of the license and service elements, license revenue is generally recognized together with the consulting services using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts.”

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed or until fair value can be objectively determined. License revenue from resellers or distributors is recognized upon sell-through to the end customer. If we determine that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Accounts Receivable Allowances

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We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Allowances are based upon a review of all significant outstanding invoices. For those invoices not specifically reviewed, allowances are made at differing rates, based upon the age of the receivable. In determining these allowances, we analyze several factors, including: our historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the allowances for accounts receivable does not reflect our future ability to collect outstanding receivables, we may record additional allowances for accounts receivable. We record the provision for accounts receivable allowances either in general and administrative expense or as a reduction of revenue based on the underlying cause of the provision to the appropriate classification in our statement of operations.

Our accounts receivable allowances totaled $9.3 million at September 30, 2004 and $8.8 million at June 30, 2004. The total provision for accounts receivable allowances was $1.4 million and $2.2 million for the three months ended September 30, 2004 and 2003 respectively. Of these amounts, $0.1 million and $0.5 million were recorded in general and administrative expense for the three months ended September 30, 2004 and 2003, respectively, and $1.3 million and $1.7 million were recorded as a reduction of revenues for the three months ended September 30, 2004 and 2003, respectively.

Net Income Per Share

Net income per share, which is also referred to as earnings per share (“EPS”), is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, unvested restricted shares and shares issuable upon conversion of Hyperion’s convertible subordinated notes. Potentially dilutive securities are excluded from the computations of diluted net income per share if their effect would be antidilutive.

The following table sets forth the computations of basic and diluted net income per share (in thousands, except per share data):

For the three months ended September 30, 2004 and 2003, stock option rights totaling 1.1 million shares and 1.0 million shares of common stock, respectively, have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

For the three months ended September 30, 2003, 0.9 million shares of common stock issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive. In the second quarter of fiscal 2004, all remaining outstanding convertible subordinated notes were redeemed.

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Stock-Based Compensation

Hyperion accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” Had Hyperion accounted for employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, Hyperion’s net income and net income per share would have been adjusted to the following pro forma amounts (in thousands, except per share data):

These pro forma amounts may not be representative of the effects for future periods as options vest over several years and additional awards are generally granted each year.

Recent Accounting Pronouncements

In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, “that the dilutive effect of contingent convertible debt instruments (“CoCo’s”) must be included in diluted earnings per share regardless of whether the triggering contingency has been satisfied, if dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement of prior period diluted earnings per share, subject to certain transition provisions. It is effective for all periods ending after December 15, 2004. The adoption of EITF 04-08 is not expected to have a material impact on our financial position or results of operations.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (“EITF 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. Hyperion adopted EITF 03-06 on April 1, 2004, and the adoption did not have a material impact on its financial position or results of operations.

In March 2004, the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,” that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method that Hyperion currently uses and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of operations. The effective date of the proposed standard is for periods beginning after June 15, 2005. It is expected that the final standard will be issued before December 31, 2004 and should it be finalized in its current form, it will have a significant impact on the consolidated statement of operations as Hyperion will be required to expense the fair value of stock option grants and stock purchases under employee stock purchase plan.

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In March 2004, the Financial Accounting Standards Board (“FASB”) approved the consensus reached on the Emerging Issues Task Force Issue (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF 03-01 also provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. The adoption of EITF 03-01 is not expected to have a material impact on our financial position or results of operations.

Income Taxes

Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated.

During the preparation of our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the tax provision in the statements of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. We have recorded a valuation allowance due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily relating to foreign net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, additional valuation allowances may need to be recorded, which could materially impact our financial position and results of operations.

Valuation of Goodwill, Intangibles, and Long-Lived Assets

We account for goodwill under SFAS 142, “Goodwill and Other Intangible Assets,” which requires us to review for impairment of goodwill on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This impairment review involves a two-step process as described in note 4 to our consolidated financial statements. We have determined that we have only a single reporting unit, and we are required to make estimates regarding the fair value of that reporting unit when testing for potential impairment. We estimate the fair value of our reporting unit using the market approach. Under the market approach, we estimate the fair value based on our market capitalization. Our determination that we have only a single reporting unit and the method used to estimate the fair value of that reporting unit requires significant judgment.

We account for finite-lived intangibles and long-lived assets under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the manner of use of the assets or the strategy for our overall business, (iii) significant decrease in the market value of the assets and (iv) significant negative industry or economic trends.

Based upon the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on the estimated future discounted cash flows using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors that may change in the near term.

3. Commitments and Contingencies

Guarantees and Indemnifications

Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), requires that Hyperion recognize the fair value for guarantee and indemnification arrangements issued or modified by Hyperion after December 31, 2002 if these arrangements are within the scope of FIN 45. In addition, we must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to

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identify if a loss has occurred. If we determine it is probable that a loss has occurred then any such estimable loss would be recognized under those guarantees and indemnifications. We have entered into agreements with some of our customers that contain indemnification provisions relating to potential situations where claims could be alleged that the Company’s products infringe the intellectual property rights of a third party. Another example of our indemnification arrangements are indemnifications of our Board of Directors and officers. We have not recorded a liability related to these indemnification and guarantee provisions. We implemented the provisions of FIN 45 as of January 1, 2003 and it has not had any significant impact on our financial position, results of operations or cash flows.

Contingencies

From time to time, in the normal course of business, various claims are made against Hyperion. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on the financial position, results of operations or cash flows of Hyperion.

4. Business Combination

Brio Software, Inc.

In October 2003, Hyperion completed its acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. Under the terms of the acquisition, Brio stockholders received a combination of 0.109 of a share of Hyperion common stock and $0.363 in cash in exchange for each share of Brio common stock, which resulted in the issuance of 4.2 million shares of Hyperion common stock and $14.0 million in cash to the Brio stockholders. Additionally, Hyperion reserved 1.1 million shares of its common stock for issuance in connection with the Brio stock options assumed in the transaction. Brio’s results of operations have been included in Hyperion’s results since the date of acquisition.

Brio provides business intelligence software with advanced query, reporting and analysis capabilities. Brio’s business intelligence tools supplement the Hyperion platform and complement our Business Performance Management offering. Hyperion expects the acquisition will result in greater integration of business intelligence into the Business Performance Management process.

The aggregate purchase price was approximately $150.1 million, which consisted of approximately $14.0 million in cash, $133.0 million in Hyperion common stock and options, and $3.1 million in acquisition costs, which primarily consist of fees paid for financial advisory, legal, and accounting services. The value of the stock issued to Brio stockholders was based upon the average of the closing prices of one share of Hyperion’s common stock during the five trading days ending July 25, 2003, which was $27.68. The fair value of Hyperion’s stock-based awards issued to employees was estimated using a Black-Scholes option pricing model. The fair value of the stock-based awards was estimated assuming no expected dividends, an expected stock price volatility of 54%, a risk free interest rate of 2.51% and an expected term of 3.56 years.

The intrinsic value allocated to unvested stock-based awards issued to employees was approximately $7.1 million and has been recorded as deferred stock-based compensation. Deferred stock-based compensation is being amortized over the remaining vesting periods of the awards.

In accordance with SFAS 141, “Business Combinations,” Hyperion allocated the purchase price to tangible assets, intangible assets, in-process research and development, deferred compensation, and liabilities based on their estimated fair values. The excess purchase price over the fair values was recorded as goodwill. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The total purchase price has been allocated as follows (in thousands):

In performing the purchase price allocation, Hyperion considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of Brio’s products. The fair

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values of intangible assets were estimated using the income approach for capitalized software and maintenance agreements, the royalty savings approach for patents and core technology, and the cost approach for customer contracts and related relationships and value added reseller relationships. The rates utilized to discount the net cash flows to their present values were based upon Hyperion’s weighted average cost of capital and range from 14% to 16%. These discount rates were determined after consideration of Hyperion’s rate of return on debt capital and equity, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the technology and assets acquired from Brio. Identifiable intangible assets purchased in the Brio acquisition consist of the following (in thousands, except for useful life):

In-process research and development (“IPR&D”) of $2.3 million was expensed in the second quarter of fiscal 2004 because the purchased research and development had no alternative uses and had not reached technological feasibility. The IPR&D relates to the Brio 8 product line. The value assigned to IPR&D was determined utilizing the income approach. The stage of completion for the project was estimated to determine the discount rate to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with the in-process technology, a discount rate of 20% was deemed appropriate for valuing IPR&D. As of September 30, 2004, the Brio 8 product line is continuing to be developed.

Pro Forma Financial Information (Unaudited)

The unaudited financial information in the table below summarizes the combined results of operations of Hyperion and Brio, on a pro forma basis, as though the companies had been combined as of the beginning of each period presented. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of each period presented. The unaudited pro forma combined statement of operations data for the three months ended September 30, 2003 combine (i) the results of Hyperion for the three months ended September 30, 2003 and (ii) the results of Brio for the three months ended September 30, 2003. The pro forma amounts are as follows (in thousands, except per share amounts):

QiQ Solutions Pty Limited

In July 2004, we acquired certain assets and assumed certain liabilities of QiQ Solutions Pty Limited, an Australian based developer of management and reporting tools for the enterprise Business Intelligence market. This acquisition was accounted for using the purchase method of accounting in accordance with SFAS 141, “Business Combinations.” Hyperion’s consolidated statements of operations include the results of QiQ from the date of acquisition.

QiQ Solutions markets several products that allow business users to build interactive dashboards through a “point and click” wizard-driven interface in the time it typically takes to build reports. Through customizable templates, the products enhance dashboard consistency and user experience across the enterprise, and reduce customers’ total cost of ownership. QiQ Solutions’ tools supplement Hyperion’s Business Intelligence Platform by enabling customers to deploy more dashboards faster and to better manage larger enterprise-wide Hyperion Performance Suite implementations.

The aggregate purchase price for the net assets of QiQ was cash of $2.0 million. Additionally, Hyperion may pay up to a maximum of $700,000 in performance payments to the shareholders of QiQ subject to the achievement of certain revenue targets established for the quarter ending December 31, 2004 through the quarter ending September 30, 2006. Of the $2.0 million purchase price, approximately $1.7 million was allocated to acquired technologies, which are being amortized over a three year period, and $0.3 million was allocated to goodwill.

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5. Restructuring Accruals

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and will ultimately result in about 150 to 200 additional developers contributing to our development efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development staff by approximately 50 employees, or approximately 10% of our development headcount, and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million. This restructuring charge consists of severance and related benefits costs. These costs were accounted for under SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” and have been included as a charge to Hyperion’s results of operations.

In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters facility located in Santa Clara, California that will accommodate all employees in our existing leased facilities in San Francisco, Sunnyvale and Santa Clara, California. In July 2004, we vacated our San Francisco facility and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $2.0 million. We expect to vacate our existing Sunnyvale and Santa Clara facilities in the second quarter of fiscal 2005, which will result in additional restructuring charges in the second quarter of approximately $6.0 million. These costs will be accounted for under SFAS 146 and will be included as a charge to Hyperion’s results of operations.

In connection with the acquisition of Brio in October 2003, management approved and initiated plans to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce the combined company’s cost structure. Consequently, Hyperion recorded restructuring charges totaling $3.6 million in fiscal 2004, including $3.4 million of employee severance costs and $0.2 million of facility closure costs. These costs were accounted for under SFAS 146 and have been included as a charge to Hyperion’s results of operations.

As a result of the acquisition of Brio, Hyperion recorded $36.1 million of restructuring costs in connection with exiting certain pre-acquisition activities of Brio, including $4.8 million of employee severance costs, $26.6 million of facility closure costs, and $4.7 million of asset impairments related to the facility closures. These costs have been recognized as liabilities assumed in the purchase business combination in accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”

In June 2001, Hyperion announced a corporate restructuring plan designed to bring costs more in line with revenues and strengthen the financial performance of the company, which resulted in a reduction of the workforce by approximately 300, or 12% of worldwide headcount. Employee groups impacted by the restructuring included personnel involved in corporate services, product business units, sales and customer support. In addition, Hyperion consolidated some of its facilities and exited other facilities. The total restructuring and other charges recorded in June 2001 were $42.8 million and were accounted for under EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which was subsequently superseded by SFAS 146. In fiscal 2004, 2003 and 2002, Hyperion made adjustments to the restructuring charges recorded in fiscal 2001 totaling $0.6 million, $0.8 million and $0.1 million, respectively. These adjustments resulted primarily from changes to estimates of sublease income related to our facility exit costs and did not represent new restructuring activities.

The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under SFAS 146 and EITF 94-3, which are included in “Other current liabilities” and “Other liabilities” in the accompanying condensed consolidated balance sheets (in thousands):

The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under EITF 95-3 which are included in “Accounts payable and accrued expenses,” “Accrued employee compensation and benefits,” and “Other liabilities” in the accompanying condensed consolidated balance sheets (in thousands):

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The restructuring costs recorded during the three months ended September 30, 2004 are based on Hyperion’s restructuring plans that have been committed to by management and are subject to refinement. Any changes to the estimates of executing the currently approved plans of restructuring will be reflected in Hyperion’s results of operations.

6. Stock Repurchases

In May 2004, Hyperion’s board of directors authorized the company to repurchase up to $75.0 million of its common stock. In the first quarter of fiscal 2005, Hyperion repurchased 941,000 shares of its common stock under this program for a total cost of $35.2 million. Of this amount, $10.4 million was recorded as a reduction to additional paid-in capital and the remaining $24.8 million was recorded as a reduction to retained earnings. Hyperion will determine the timing and amount of future repurchases based upon market conditions and other factors and will use existing cash and short-term investments to finance the transactions.

7. Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Hyperion has identified one industry segment: the development and marketing of business performance management software and related services. This segment operates in three geographic regions: the Americas (United States, Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Hyperion’s products are marketed internationally through Hyperion’s direct sales force, independent distributors and application resellers.

Enterprise-wide information is provided in accordance with SFAS 131. Geographic revenue information is primarily based on the ordering location of the customer, and long-lived asset information is based on the physical location of the assets. The following table presents revenues and long-lived assets by geographic region (in thousands):

The following table presents revenues for groups of similar products and services (in thousands):

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain information contained in this report on Form 10-Q is forward-looking in nature. All statements included in this report on Form 10-Q or made by management of Hyperion Solutions Corporation and its subsidiaries, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Hyperion’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Factors That May Affect Future Results.” These and many other factors could affect Hyperion’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Hyperion or on its behalf. Hyperion does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

OVERVIEW

Hyperion provides business performance management software that enables companies to translate strategies into plans, monitor execution and provide insight to improve financial and operational performance. We combine a complete set of interoperable applications with a business intelligence platform to support and create business performance management solutions. In addition, we offer support and services from offices in 20 countries and are represented by distributors in an additional 25 countries. We work with over 600 partners to provide specialized solutions to more than 9,000 customer organizations worldwide. Hyperion is headquartered in Sunnyvale, California and employs approximately 2,500 people globally.

RESULTS OF OPERATIONS

We acquired Brio Software, Inc. on October 16, 2003. Brio’s results of operations have been included in Hyperion’s results beginning on the date of acquisition. In addition to the incremental revenue streams associated with Brio products and services, our headcount increased by approximately 15% as a result of the acquisition.

REVENUES

Total revenues increased 29% in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Total revenues declined approximately 10% quarter-over-quarter, historically in line with seasonal declines associated with the first quarter. Geographically, first quarter fiscal 2005 Americas, EMEA and APAC revenues declined 12%, 3% and 17%, respectively, from fourth quarter fiscal 2004.

The change in foreign currency exchange rates favorably affected total revenues in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 by approximately $3.7 million primarily due to the strength of the Euro against the U.S. dollar. Excluding the impact of foreign currency exchange rate changes, total revenues would have increased 26% in the first quarter of fiscal 2005 compared to the same period in fiscal 2004.

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Software licenses. Software license revenues increased 33% to $57.4 million in the first quarter of fiscal 2005 from $43.0 million in the first quarter of fiscal 2004. While this license revenue growth was predominantly attributable to sales of Hyperion Performance Suite, the former Brio products, we also experienced growth across our financial applications.

We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our license revenue through our direct sales force, but we continue to focus on complementing our direct sales force with channel partners, which include original equipment manufacturers, value added resellers, system integrators and independent distributors. License revenue from channel partners comprised 27% of total license revenue in the first quarter of fiscal 2005 compared to 24% in the first quarter of fiscal 2004. The percentage of license revenue derived from our channel partners can fluctuate between periods, as it is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single channel partner represented more than 10% of total revenue during the periods presented.

Maintenance and services. Maintenance and services revenue increased 27% in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, which was comprised of a 29% increase in maintenance revenue and a 22% increase in consulting and training services revenue.

The increase in maintenance revenue in the first quarter of fiscal 2005 was primarily attributable to our acquisition of Brio in October 2003 and, to a lesser extent, to year-over-year growth of our installed customer base. The increase in consulting and training services revenue in the first quarter of fiscal 2005 was principally due to our acquisition of Brio in October 2003 and, to a lesser extent, to increased utilization rates in our consulting organization.

COST OF REVENUES

Cost of software license revenue. Cost of software license revenue consists primarily of royalty expenses, amortization of capitalized software development costs, amortization of acquired technologies, and the cost of product packaging and documentation materials. Total cost of software licenses, as a percent of revenues, declined slightly in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Royalty expense in the first quarter of fiscal 2005 decreased $1.3 million compared to the same period in fiscal 2004 primarily due to a different mix of product sales as well as the termination of an OEM relationship. Partially offsetting the decrease in royalty expense was a $1.2 million increase in amortization expense primarily resulting from our acquisition of Brio in October 2003.

Gross margin on software license revenue was 94% in the first quarter of fiscal 2005 compared to 93% for the first quarter of fiscal 2004.

In the first three months of fiscal 2005 and 2004, we capitalized $1.8 million and $0.4 million of software product development costs, respectively, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” The amounts capitalized relate to localization costs for our software products. The increased investment in localization costs can be attributed to the addition of new localized products and modules to our product suite as well as expanding our localization into new languages and increasing the scope of localization in current markets. Capitalized software product development costs are amortized over the estimated economic lives of the products, which is generally three years. The amortization of capitalized product development costs begins upon the general release of the software to customers.

Cost of maintenance and services revenue. Cost of maintenance and services revenue consists largely of compensation and benefits for support, consulting and training personnel. Cost of maintenance and services revenue increased 23% to $37.3 million in the first quarter of fiscal 2005 from $30.5 million in the first quarter of fiscal 2004. The increase in cost of maintenance and services revenue in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 was principally due to a $2.5 million increase in employee expenses and a $2.1 million increase in subcontractor and other external personnel costs, both of which primarily resulted from our acquisition of Brio in October 2003. Maintenance and services headcount grew to 762 employees at September 30, 2004 from 737 employees at September 30, 2003, primarily due to the addition of incremental Brio employees.

Gross margin percent increased slightly to 63% in first quarter fiscal 2005 from 62% in the same quarter last year.

OPERATING EXPENSES

Total first quarter fiscal year 2005 operating expenses grew approximately 30% over the same period last year. Our acquisition of Brio accounted for the majority of the increase from the same quarter last year, primarily represented by

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additional headcount related costs and facilities expenses.

We expect second quarter fiscal year 2005 operating expenses to increase over first quarter fiscal year 2005 due to higher compensation costs associated with our October salary merit increase and due to continued investments in sales and marketing activities. We expect to hire additional headcount in the field organization and increase our field marketing efforts.

Sales and marketing. Sales and marketing expense increased 38% to $58.7 million in the first quarter of fiscal 2005 from $42.4 million in the first quarter of fiscal 2004. This increase was mainly due to a $9.9 million increase in employee expenses and $1.5 million increase in external personnel cost resulting primarily from our acquisition of Brio in October 2003 and a higher effective commission rate in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. Sales and marketing headcount grew to 851 employees at September 30, 2004 from 689 employees at September 30, 2003, primarily due to the addition of incremental Brio employees.

Research and development. Research and development expense increased 30% to $25.7 million in the first quarter of fiscal 2005 from $19.8 million in the first quarter of fiscal 2004. This increase was mainly attributable to a $3.2 million increase in employee expenses and $1.3 million increase in subcontractors and external personnel cost, both of which primarily resulted from our acquisition of Brio in October 2003. Research and development headcount grew to 502 employees at September 30, 2004 from 432 employees at September 30, 2003, primarily due to the addition of incremental Brio employees.

General and administrative. General and administrative expense increased 15% to $14.9 million in the first quarter of fiscal 2005 from $12.9 million in the first quarter of fiscal 2004. This increase was principally due to a $0.9 million increase in employee expenses that resulted from our acquisition of Brio in October 2003. General and administrative headcount grew to 363 employees at September 30, 2004 from 343 employees at September 30, 2003, primarily due to the addition of incremental Brio employees.

RESTRUCTURING CHARGES

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and will ultimately result in about 150 to 200 additional developers contributing to our development efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development staff by approximately 50 employees, or approximately 10% of our development headcount, and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million. This restructuring charge consists of severance and related benefits costs.

In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters facility located in Santa Clara, California that will accommodate all employees in our existing leased facilities in San Francisco, Sunnyvale and Santa Clara, California. In July 2004, we vacated our San Francisco facility and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $2.0 million. We expect to vacate our existing Sunnyvale and Santa Clara facilities in the second quarter of fiscal 2005, which will result in additional restructuring charges in the second quarter of approximately $5.0 - $6.0 million.

INTEREST AND OTHER INCOME

Interest and other income consists primarily of interest earned on cash, cash equivalent and short-term investment balances. Interest and other income increased 19% to $1.4 million in the first quarter of fiscal 2005 compared to $1.1 million in the first quarter of fiscal 2004.

INTEREST AND OTHER EXPENSE

Interest and other expense consists primarily of interest paid and amortization of deferred issuance costs related to our convertible subordinated notes. Interest and other expense decreased 98% in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 due to the redemption of all of our remaining convertible notes in the second quarter of fiscal 2004.

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INCOME TAX PROVISION

Our effective income tax rate was 35% and 37% for the first quarters of fiscal 2005 and 2004, respectively. We anticipate an income tax rate of 35% for all of fiscal 2005.

NET INCOME

We generated net income of $11.6 million, or $0.29 per diluted share, in the first quarter of fiscal 2005 compared to net income of $9.7 million, or $0.26 per diluted share, in the first quarter of fiscal 2004.

We project total revenues in the second quarter of fiscal 2005 to be in the range of $166.0 million to $170.0 million. We expect earnings per share for the second quarter of fiscal 2005 to be in the range of $0.24 to $0.29 per diluted share, assuming an effective tax rate of 35% and projected diluted shares outstanding of approximately 40.5 million.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2004, we had $359.5 million in cash and cash equivalents and $3.0 million in short-term investments, consisting primarily of balances in interest-bearing demand deposit accounts, state and municipal bonds, U.S. government and agency obligations and other highly-liquid securities. At September 30, 2004, our working capital was $260.6 million.

In the first quarter of fiscal 2005 and 2004, we generated positive cash flow from operations of $30.3 million and $14.7 million, respectively. In the first quarter of fiscal 2005, our operating cash flow was due to the net income generated during the period, significant decrease in accounts receivable and the impact of the non-cash charges reflected in the net income amount such as depreciation and amortization expense, partially offset by decreases in accrued employee compensation and benefits and deferred revenue. In the first quarter of fiscal 2004, our positive operating cash flow was primarily due to the net income generated during the period and the impact of the non-cash charges reflected in the net income amount such as depreciation and amortization expense, as well as a substantial decrease in accounts receivable due to our focus on invoicing and collection process improvements in fiscal 2003. These cash inflows were partially offset by decreases in accounts payable, accrued expenses and accrued employee compensation and benefits.

Net cash used in investing activities amounted to $9.3 million in the first quarter of fiscal 2005 compared to net cash provided by investing activities of $1.9 million in the first quarter of fiscal 2004. The cash used in investing activities in the first quarter of fiscal 2005 resulted from purchases of property and equipment of $4.7 million, purchase of intangible assets of $1.8 million and payment for acquisition, net of cash acquired, of $2.8 million. The cash provided by investing activities in the first quarter of fiscal 2004 resulted primarily from proceeds from maturities of investments, net of purchases, of $6.1 million, partially offset by purchases of property and equipment of $3.7 million.

Net cash used in financing activities was $26.7 million and $18.7 million in the first quarter of fiscal 2005 and 2004, respectively. The cash used in financing activities in the first quarter of fiscal 2005 primarily resulted from $35.2 million repurchases of Hyperion common stock, which was partially offset by $8.5 million of proceeds from issuance of common stock under employee stock option and stock purchase plans. The cash used in financing activities in the first quarter of fiscal 2004 resulted from $26.0 million of repurchases of Hyperion common stock, partially offset by $7.3 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans. As of September 30, 2004, we are authorized to repurchase up to an additional $33.7 million of common stock under the repurchase plan authorized by our board of directors in May 2004. We expect to continue to repurchase shares of common stock under this plan during the remainder of fiscal 2005, subject to market conditions and other factors.

We intend to fund our capital requirements, as well as our liquidity needs, with existing cash, cash equivalent and short-term investment balances as well as cash generated from future operations, if any. However, capital requirements will depend on many factors, including our rate of revenue growth, market acceptance of our products, the timing and extent of development projects and increases in operating expenses, all of which are subject to uncertainty. We believe that our existing cash, cash equivalent and short-term investment balances, and cash generated from our future operations, if any, will be sufficient to

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finance our business through at least September 30, 2005. To the extent that existing cash, cash equivalent and short-term investment balances and cash generated by operations are insufficient to fund future activities, we may need to raise additional funds through public or private debt or equity financing. Additional funds may not be available on terms favorable to us or at all. In addition, our ability to generate positive cash flows from operations will be impacted by changes in customer demand and acceptance of our products as well as our ability to manage operating expenses and achieve further operational efficiencies.

The following table summarizes our contractual obligations as of September 30, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

[1]	For the year ending June 30, 2005, the table above includes only those obligations to be settled between October 1, 2004 and June 30, 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, “that the dilutive effect of contingent convertible debt instruments (“CoCo’s”) must be included in diluted earnings per share regardless of whether the triggering contingency has been satisfied, if dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement of prior period diluted earnings per share, subject to certain transition provisions. It is effective for all periods ending after December 15, 2004. The adoption of EITF 04-08 is not expected to have a material impact on our financial position or results of operations.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (“EITF 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. Hyperion adopted EITF 03-06 on April 1, 2004, and the adoption did not have a material impact on its financial position or results of operations.

In March 2004, the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95,” that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method that Hyperion currently uses and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of operations. The effective date of the proposed standard is for periods beginning after June 15, 2005. It is expected that the final standard will be issued before December 31, 2004 and should it be finalized in its current form, it will have a significant impact on the consolidated statement of operations as Hyperion will be required to expense the fair value of stock option grants and stock purchases under employee stock purchase plan.

In March 2004, the Financial Accounting Standards Board (“FASB”) approved the consensus reached on the Emerging Issues Task Force Issue (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF 03-01 also provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. The adoption of EITF 03-01 is not expected to have a material impact on our financial position or results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

We operate in a very competitive and rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risks.

Product enhancement and new product introductions involve inherent risks.

Hyperion competes in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology and frequent new product introductions and

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enhancements. Hyperion continually seeks to expand and refresh its product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into Hyperion’s products. The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to:

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product quality, including the possibility of software defects;

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the fit of the new products and features with the customer’s needs;

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the successful adaptation of third-party technology into Hyperion’s products;

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educating Hyperion’s sales, marketing and consulting personnel to work with the new products and features;

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competition from earlier and more established entrants;

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market acceptance of initial product releases;

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marketing effectiveness; and

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the accuracy of assumptions about the nature of customer demand.

Hyperion’s failure to successfully introduce, market and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position and/or price its products, as well as undetected errors or delays in new products or new versions of a product could have a material adverse effect on Hyperion’s business, results of operations or financial position. These risks tend to be greater when newer products make up a larger portion of the overall product mix. As more and more of these newer products are deployed, Hyperion’s service and maintenance organizations, along with its partners, must rapidly increase their ability to install and service these products, and Hyperion must rapidly improve their ease-of-implementation and ease-of-use. The failure to successfully increase these capacities and make these improvements could result in significantly lower customer satisfaction, which could lead to lower revenues and profits. For fiscal 2005, important newer products or product enhancements include Performance Suite 8 and Essbase 7X.

Hyperion operates in a very competitive environment.

The markets in which Hyperion competes are intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Hyperion has experienced, and expects it will continue to experience, vigorous competition from current competitors and new competitors, some of whom may have significantly greater financial, technical, marketing and other resources than Hyperion does. Cognos competes with Hyperion across a wide range of products, offering what they refer to as Corporate Performance Management solutions, as do, generally, the major ERP vendors, including SAP, Microsoft, Oracle and Peoplesoft. Many other companies compete in specific areas of Hyperion’s business. SAS and PeopleSoft have OLAP products and analytic applications, Business Objects and Cognos have query and reporting products, and numerous smaller vendors offer specific applications that compete with a single Hyperion product. Hyperion expects additional competition as other established and emerging companies, including Microsoft, PeopleSoft, SAP and Oracle, move further into both the application and platform parts of the business performance management software market. This competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect Hyperion’s business, operating results and financial condition.

If Hyperion is unable to develop or acquire new and enhanced products that achieve widespread market acceptance, Hyperion may be unable to recoup product development costs, and Hyperion’s earnings and revenue may decline.

Hyperion’s future success depends on its ability to address the rapidly changing needs of its customers by developing or acquiring new products and introducing such products, product updates and services on a timely basis. Hyperion must also extend the operation of its products to new platforms and keep pace with technological developments and emerging industry standards. Hyperion commits substantial resources to developing new software products and services. If the markets for these new products do not develop as anticipated, or demand for its products and services in these markets does not materialize or occurs more slowly than Hyperion expects, Hyperion will have expended substantial resources and capital without realizing corresponding revenue, and Hyperion’s business and operating results could be adversely affected.

Failure to upgrade older products will adversely affect revenue.

As newer products are introduced by Hyperion, or by its competition, the market’s demand for Hyperion’s older products declines. Declining demand reduces revenue from additional licenses, and reduces maintenance revenue from past purchasers of Hyperion’s software. We must continually upgrade older products in order for customers to continue to see value in Hyperion’s maintenance services. If Hyperion is unable to provide continued improvements in functionality, or, alternatively, move customers from older to newer products, declining maintenance and new license revenue from older products could have a material adverse effect on Hyperion’s business.

Hyperion typically has back-ended quarters.

Quarterly revenues and operating results are highly dependent on the volume and timing of the signing of licensing agreements and product deliveries during the quarter, which are difficult to forecast. Significant portions of Hyperion’s quarterly software licensing agreements are concluded in the last month of the fiscal quarter, generally with a concentration of such revenues in the final week of that month. Due to the relatively fixed nature of certain costs, including personnel and

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facilities expenses, a decline or shortfall in quarterly and/or annual revenues typically results in lower profitability or may result in losses. Prior to the very end of any quarter, Hyperion must rely on its forecasts of revenue for planning, modeling and other purposes. However, forecasts are only estimates and may not correlate to revenues in a particular quarter or over a longer period of time. Consequently, a significant discrepancy between actual results and sales forecasts could cause Hyperion to improperly plan or budget and thereby adversely affect Hyperion’s business or results of operations. Any publicly stated revenue or earnings projections by Hyperion are especially subject to this risk.

A change in pricing or marketing could adversely affect Hyperion’s business.

In an effort to simplify and clarify Hyperion’s product positioning and marketing, Hyperion periodically makes changes to its product pricing or product descriptions. Any product price reductions may not be offset by sufficient increases in unit sales to maintain or increase license revenues, and any broadly based changes to pricing or marketing messages could cause customers to change or delay their purchasing decisions in response to such revisions. Additional risks of such changes include delays in transactions as Hyperion’s sales force learns how to deploy the new pricing or convey Hyperion’s new marketing messages and delay or loss of revenues as the competition reacts to the pricing and marketing changes, any of which could have a material adverse effect on Hyperion’s business, results of operations or financial position.

Hyperion may not be able to continue its operational improvements.

As part of Hyperion’s focus on improving its operating margins, Hyperion is driving toward increased efficiencies in its sales force, as well as Hyperion’s services, product development, product marketing, finance, information technology, human resources and other administrative processes. The ability to continue to realize current efficiencies and find ways to improve on past performance is crucial to the improvement of operating margins. Any increase in the relative cost of these functions, or failure to continue to realize current efficiencies, could have a material adverse effect on Hyperion’s profits.

Reorganizations may adversely affect productivity.

Hyperion has continued to make adjustments to its operations and organization. For example, we are currently making changes to the structure of the North American sales organization. These changes have historically resulted in productivity declines and could have a negative impact on revenue in the short term. The revised operations and/or organization must keep improving over past performance in order to provide better operating margins and efficiencies. Failure to maintain or improve momentum and productivity could materially adversely impact Hyperion’s revenue and profits.

While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending June 30, 2005, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls.

     The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. Auditing Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting under Section 404. Management’s assessment of internal controls over financial reporting requires management to make subjective judgments and, particularly because Auditing Standard No. 2 is newly effective, some of the judgments will be in areas that may be open to interpretation and therefore the report may be uniquely difficult to prepare and our auditors may not agree with our assessments.

     While we currently believe our internal control over financial reporting is effective, we are still performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of June 30, 2005 (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

While we currently anticipate being able to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new Auditing Standard No. 2.

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Hyperion’s international operations are subject to significant risks.

Hyperion derives a substantial portion of its revenue from customers located outside of the United States. Hyperion’s international operations are subject to risks, including:

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fluctuations in currency exchange rates and economic instability such as higher interest rates and inflation, which could reduce Hyperion’s customers’ ability to obtain financing for software products or which could make Hyperion’s products more expensive in those countries;

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difficulties in hedging foreign currency transaction exposures;

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potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;

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imposition of foreign laws and other governmental controls, including trade and employment restrictions;

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longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;

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difficulties in staffing and managing its international operations, including difficulties related to administering Hyperion’s stock option plan in some foreign countries;

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difficulties in coordinating the activities of Hyperion’s geographically dispersed and culturally diverse operations;

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competition from local suppliers;

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costs and delays associated with developing software in multiple languages; and

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political unrest, war or terrorism, particularly in areas in which Hyperion has facilities.

Hyperion may not be able to successfully address each of these challenges.

Exchange rate fluctuations may adversely affect results.

Hyperion conducts a significant portion of its business in currencies other than the United States dollar. Hyperion’s operating results are, therefore, subject to fluctuations in foreign currency exchange rates. Hyperion’s revenues and operating results are adversely affected when the United States dollar strengthens relative to other currencies and are positively affected when the United States dollar weakens. Changes in the value of major foreign currencies, particularly the Euro, relative to the value of the United States dollar positively affected revenues and operating results in the first quarter of fiscal 2005. If the United States dollar strengthens relative to other currencies in the future, our revenues, operating results and cash flows will be adversely affected.

There are significant risks related to any business combination.

Hyperion has made, and may in the future make, acquisitions of, mergers with, or significant investments in, businesses that offer complementary products, services and technologies. There are risks involved in these activities, including but not limited to:

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the possibility that Hyperion pays more than the value it derives from the acquisition;

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the difficulty of integrating the products, operations and personnel of the acquired businesses;

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the possibility that all aspects of the integration are not completed or that all of the anticipated synergies of the acquisition are not realized;

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difficulties in managing software development activities to define a combined product roadmap, ensuring timely development of new products, timely release of new products to market, and the development of efficient integration and migration processes and tools;

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the difficulty of retaining key alliances on attractive terms with partners and suppliers;

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the difficulty of retaining and recruiting key personnel and maintaining employee morale;

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the potential product liability associated with selling the acquired company’s products;

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the potential disruption of Hyperion’s ongoing business and the distraction of management from Hyperion’s business; and

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the potential write-down of impaired goodwill and intangible and other assets. In particular, Hyperion recorded approximately $126.7 million of goodwill related to the acquisition of Brio that will not be amortized in the ordinary course of business. To the extent that the business acquired in that transaction (primarily the Performance Suite products) does not remain competitive, some or all of the goodwill related to that acquisition could be charged against future earnings.

These factors could have a material adverse effect on Hyperion’s business, results of operations or financial position, especially in the case of a large acquisition.

Hyperion is subject to the possibility of infringement claims.

Hyperion expects that software product developers will increasingly be subject to infringement claims as the number of

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products and competitors in Hyperion’s industry segment grows and the functionality of products in different industry segments overlaps. Hyperion has in the past been subjected to patent infringement claims. Any such claims, with or without merit, could be time consuming and costly to defend, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all, and may require the payment of substantial amounts of money. In the event of a successful product infringement claim against Hyperion, and Hyperion’s failure or inability to license the infringed or similar technology, Hyperion’s business, operating results, financial condition and cash flows could be materially adversely affected.

Enforcement of Hyperion’s intellectual property rights may be difficult.

Hyperion relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect Hyperion’s proprietary rights. Hyperion’s means of protecting its proprietary rights in the United States or abroad may not be adequate and could be subject to challenge, such as the reexamination of one of our patents by the United States Patent and Trademark Office.

Hyperion’s stock price may be volatile.

The market price of Hyperion’s common stock is subject to significant fluctuations. The market price of Hyperion’s common stock may be significantly affected by such factors as the announcement of new products, product enhancements or technological innovation by Hyperion or Hyperion’s competitors, announcements of acquisitions by Hyperion, changes in Hyperion’s or Hyperion’s competitors’ results of operations, changes in revenue, revenue growth rates and revenue mix, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Technology stocks have experienced wide fluctuations in prices, which sometimes have been unrelated to their operating performance. The market price of Hyperion’s common stock could be adversely affected by such fluctuations.

Hyperion is dependent upon indirect channel partners.

In addition to its direct sales force, Hyperion relies on indirect channel partners such as OEMs, VARs and distributors for licensing and support of its products in the United States and internationally. License revenue from channel partners comprised 27% of Hyperion’s total license revenue for the first quarter of fiscal 2005. Indirect channel sales involve a number of special risks, including:

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Hyperion’s lack of control over the delivery of its products to end-users;

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Hyperion’s resellers and distributors may terminate their relationship with Hyperion on short notice; and

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Hyperion’s resellers and distributors may market and distribute competing products.

Hyperion’s current indirect channel partners may not elect, or be able, to market or support Hyperion’s products effectively or be able to release their products embedded with Hyperion products in a timely manner. Hyperion may not be able to effectively manage conflicts between its various indirect channel and direct customers, and economic conditions or industry demand may adversely affect indirect channel partners or indirect channel partners may devote greater resources to marketing and supporting the products of other companies. Revenues derived from indirect channel partners may fluctuate significantly in subsequent periods.

Hyperion’s most significant channel partner is IBM Corporation. Hyperion signed an OEM agreement with IBM in September 1996. This agreement can be terminated by IBM on 90 days notice anytime after September 27, 1996 and by Hyperion on 90 days notice anytime after December 31, 2003. If this agreement is terminated by either party, our revenues, operating results and cash flows could be adversely affected.

Hyperion is exposed to product liability claims.

Hyperion’s license agreements with its customers typically contain provisions designed to limit Hyperion’s exposure to potential product liability claims, and Hyperion carries insurance to protect against such claims. It is possible, however, that the limitation of liability provisions contained in Hyperion’s license agreements may not be effective as a result of U.S. or foreign laws or ordinances or because of judicial decisions, and that liability insurance may not be available, or that coverage for specific claims may be denied. Although Hyperion has not experienced any material product liability claims to date, the sale and support of business performance management products by Hyperion entails the risk of such claims. A successful product liability claim brought against Hyperion could have a material adverse effect upon Hyperion’s business, operating results and financial condition.

Defects in Hyperion’s products could increase its costs, adversely affect its reputation, diminish demand for its products and hurt its operating results.

As a result of their complexity, Hyperion’s software products may contain undetected errors or viruses. Errors in new products or product enhancements might not be detected until after initiating commercial shipments, which could result in

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additional costs, delays, possible damage to Hyperion’s reputation and could cause diminished demand for Hyperion’s products. This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance or sell new licenses.

Employee turnover could adversely impact revenue, costs and productivity.

As employees leave Hyperion, it suffers loss of productivity while new employees are hired, or promoted into vacant positions. There are also costs of recruiting and re-locating new employees. New employees must learn the Hyperion organization, products and procedures. Promoted employees must learn new skills. All of this takes time, reduces productivity and increases cost. The potential adverse impact of employee turnover is greater for situations involving senior positions in the company. Turnover rates tend to increase as economic conditions improve. If turnover increases, the adverse impacts of turnover could materially affect Hyperion’s costs, productivity or ability to respond quickly to the competitive environment.

Some provisions in Hyperion’s charter documents and its stockholder rights plan may prevent or deter an acquisition of Hyperion.

Some of the provisions in Hyperion’s charter documents may deter or prevent certain corporate actions, such as a merger, tender offer or proxy contest, which could affect the market value of Hyperion’s securities. These provisions include:

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Hyperion’s board of directors is authorized to issue preferred stock with any rights it may determine. Consequently, Hyperion’s board of directors may issue preferred stock, without shareholder approval, that has rights superior to the outstanding Hyperion common stock;

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Hyperion’s board of directors is classified into three groups, with each group of directors holding office for three years. The effect of this classified board is that two annual meetings, not one, are required to replace a majority of the board of directors;

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Hyperion stockholders are not entitled to cumulate votes for directors; and

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special meetings of Hyperion stockholders may be called only by Hyperion’s president or by the president or secretary upon written request by a majority of the board of directors and may not be called by Hyperion’s stockholders.

Hyperion has in place a stockholder rights plan that is designed to discourage coercive takeover offers. In general, Hyperion’s stockholder rights plan makes it uneconomic for any person to acquire more than a 15% interest in Hyperion without the consent of the Hyperion Board of Directors.

Hyperion’s board of directors could utilize the provisions of its charter documents and stockholder rights plan to resist an offer from a third party to acquire Hyperion, including an offer to acquire Hyperion common stock at a premium to its trading price or an offer that is otherwise considered favorable by Hyperion stockholders.

If requirements relating to the accounting treatment for employee stock options are changed, Hyperion’s earnings may be adversely affected and we may be forced to change our employee compensation and benefits practices.

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” under which we generally do not record compensation expense related to employee stock options. On March 31, 2004, the Financial Accounting Standards Board issued an Exposure Draft of a proposed accounting standard that would require public companies to report compensation expense related to stock options and other forms of stock-based compensation based on the estimated fair value of the awards on the grant dates. The final standard is expected to be issued in the second quarter of fiscal 2005 and could be effective beginning in our fiscal year 2006. If the proposed standard is adopted in its current form, our earnings will be negatively impacted. Also, we may consider changing our employee compensation and benefits practices in a manner that could adversely impact our ability to retain existing employees and attract qualified candidates.

Failure to get approval for additional shares of common stock to be granted as employee stock options or restricted stock could adversely affect our ability to attract and retain employees.

We are seeking to obtain stockholder approval for additional shares of common stock that could be granted as employee stock options or restricted stock to our employees and directors. We may not be able to secure approval for these additional shares. If we do not get such approval, we will be forced to curtail our option issuance, which will adversely impact our ability to retain existing employees and attract qualified candidates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The primary objective of our investment activities is to preserve principal while maximizing yields, without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of high-quality, liquid securities. At September 30, 2004, our short-term investments consisted of

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investment-grade debt securities with a fair value of $3.0 million. The portfolio is invested in securities with relatively short maturities to minimize interest rate risk and for liquidity purposes in the event of immediate cash needs. Due to the short duration of our investment portfolio, an immediate 10% change in market interest rates would not have a material impact on the value of our investment portfolio.

FOREIGN CURRENCY EXCHANGE RATE RISK. We transact business in various foreign currencies. Our exposure to foreign currency exchange rate fluctuations arises in part from non-functional currency denominated trade accounts receivable and intercompany accounts receivable. Intercompany accounts receivable arise when software royalty fees and certain other costs incurred in the United States are charged to our foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary, which is generally their local currency. From time to time, we utilize foreign currency forward exchange contracts to offset the risk associated with the effects of these trade receivables and the effects of certain intercompany receivables for which we anticipate settlement in the foreseeable future. As a result, increases or decreases in these accounts due to foreign exchange rate changes are offset by gains and losses on the forward contracts, so as to minimize foreign currency transaction gains and losses. Our forward contracts generally have terms of 60 days or less. We do not use forward contracts for trading purposes. All foreign currency balances and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in our consolidated statements of operations. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature.

Net foreign exchange transaction gains and losses were not material for the first quarter of fiscal 2005. As of September 30, 2004, we had net forward contracts to sell U.S. dollar equivalent of $31.7 million in foreign currency. An immediate 10% change in currency exchange rates affecting these contracts would not have a material impact on our results of operations.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no significant changes in our internal control over financial reporting identified in connection with our evaluation that occurred during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, in the normal course of business, various claims are made against us. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on our financial position, results of operations or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth, for the periods indicated, our purchases of common stock.

[1]	On May 20, 2004, we announced that our board of directors had authorized a plan to repurchase up to $75.0 million of our common stock.

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 9, 2004	Hyperion Solutions Corporation (Registrant)
	By:	/s/ DAVID W. ODELL
		David W. Odell
		Chief Financial Officer

	By:	/s/ WILLIAM B. DEWES
		William B. Dewes
		Global Controller (Principal Accounting Officer)

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EXHIBIT INDEX

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